European stocks fall as OECD calls for ECB action

PostNL rallies 10% after swinging to profit

LONDON (MarketWatch) — European stock markets dropped on Tuesday after the OECD called on the European Central Bank to cut interest rates immediately to fight low inflation, while UBS and PostNL rose on solid earnings results.

The Stoxx Europe 600 index
SXXP, +1.09%
fell 0.3% to close at 336.04, after swinging between small gains and losses earlier in the day.

Quarterly results were in the spotlight, Dutch mail and freight company PostNL NV
PNL, +1.49%
rallying 10% after it said it swung to a profit in the first quarter and lifted its 2014 guidance.

Shares of UBS AG
CH:UBSNUBS, +0.10%
closed up 0.3% after the Swiss bank reported first-quarter earnings that beat expectations and said profit rose to 1.1 billion Swiss francs ($1.25 billion), compared with 988 million francs reported a year earlier. The bank also said it aims to pay out at least 50% of net profits in capital returns to shareholders, while still investing for growth.

The broader investing mood in Europe was dented by a warning from the Organization for Economic Cooperation and Development about the euro zone’s low level of inflation, urging the European Central Bank to cut rates immediately. The organization said the currency union is at risk of slipping into deflation — or a period of self-reinforcing price declines — unless the ECB acts swiftly, suggesting the main refinancing rate should be cut to 0% from the current 0.25%.

The call came ahead of the ECB meeting on Thursday, when most economists expect the Governing Council to make no changes to monetary policy after inflation in April rose from March’s four-year low. Analysts at Barclays said in a note, however, that the decision remains a close call and that a rate cut would probably be the preferred option, if the ECB opts for more easing.

Germany’s DAX 30 index
DAX, +0.86%
dropped 0.7% to 9,467.53, with a downbeat note from Credit Suisse adding pressure. The investment bank moved to a benchmark position on German stocks from overweight, citing three reasons for the downgrade: Germany’s growth premium relative to Europe is shrinking; competitiveness and funding-cost advantages are waning; and the country is exposed to Chinese risk, with triple export-exposure compared with Europe.

At the same time, Credit Suisse lifted French stocks to overweight from underweight in a bet on quantitative easing from the European Central Bank. The CAC 40 index
PX1, +1.13%
fell 0.8%, however, to 4,428.07. Shares of Alstom SA
ALO, +0.84%weighed in Paris, down 2.2%, after the French government urged General Electric Co.
GE, +1.35%
to alter the terms of its proposed $17 billion takeover of Alstom‘s energy assets.

Global equity strategist Andrew Garthwaite said France would benefit more than Germany from any ECB easing.

In data news on Tuesday, the composite euro-zone purchasing managers index for April rose to 54, unchanged from the flash reading, signaling the fastest rate of economic growth in almost three years.

Retail sales for the currency union rose 0.3% in March, beating analyst expectations. Sales have now risen in each of the first three months of the year. Howard Archer, chief U.K. and European economist at IHS Global Insight, estimated euro-zone GDP in the first quarter to have grown by 0.4%.

“While still not exactly stellar, this would be the best euro-zone GDP growth performance since the first quarter of 2011,” he said.

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